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How the federal government shutdown impacts Maryland

Mikra Krasniqi is an economist at the Maryland Department of Business and Economic Development.

The federal government shutdown will have an adverse effect on the entire United States economy and especially the Washington, D.C. area. While federal government civilian and military spending makes up about 4 percent of U.S. economic output and federal employment contributes with about 2 percent of all jobs, the effects of the shutdown might have far-reaching consequences given the tenuous state of economic recovery from the recession.

Figure 1 Federal Civilian Employment by State

Source: DBED, BEA 2012

With 6 percent of all jobs in the state, Maryland’s share of federal employment is higher than most states. Over 80 percent of Maryland jobs are in private sector firms across the state, while state and local government make up the remaining 14 percent of jobs in Maryland.

Figure 2 Composition of Employment and Earned Wages in Maryland

Source: 2012 Employment and Wages, DLLR

The Washington, D.C. area is not only the center of federal employment, it is also the largest recipient of federal contracting dollars. The value of federal government contracts was about $104 billion in 2012, according to a report by Bloomberg Government which was based on the locations of headquarters of the 200 largest contractors. This amount represents about 20 percent of all federal contracting, which stood at $517.6 billion in 2012 according to USASpending.gov.

Of the total 2012 federal spending, firms received federal contracts to perform $27.3 billion worth of work in Maryland, making Maryland the fourth largest recipient of federal procurement dollars. The largest federal contractor, Bethesda-based Lockheed Martin Corp., which was awarded contracts valued at $1.8 billion in Maryland and a total of $36 billion nationwide, employs about 5,000 people in Montgomery County alone.

Figure 3 Federal Procurement Top 10 States 2012

Source: DBED, USASpending.gov

While large contractors like Lockheed dominate in terms of the share of employment and spending in the state, there are more than 14,000 Maryland firms that contract with the federal government. Nearly half of those are small firms receiving federal contracts as prime contractors. The halt in federal economic activity means that these firms may not be as well-cushioned as other big businesses are during a prolonged shutdown, which may result in cancellations, investment delays, reduced spending and possible layoffs under a cloud of ongoing uncertainty.

Impact on Workers and Families

While the exact number of furloughed workers from the state is unknown, about 315,000 state residents work for the federal government. Most of those live and work in Maryland, but at least a third of them work in the District of Columbia or Virginia.  These workers earned a total of $25.6 billion in wages and salaries in 2012.

Delayed paychecks for Maryland-based furloughed workers means delayed spending and consumption, which has ripple effects for hundreds and thousands of families, individuals, schools, hospitals, and businesses across the state and industries. It is estimated that a two-week loss of income to federal workers might reduce spending on taxable goods by more than $145 million. In other words, there will be about $15 million in lost economic activity during each shutdown day.

The fallout from the shutdown will also affect government revenues. The Maryland Department of Budget and Management estimates that a two-week loss of income for federal workers in Maryland could reduce state tax revenues by as much as $51 million or about $5 million in state revenue loss for each shutdown day.  And the effects will only get worse as the stalemate continues.  According to Moody’s Analytics, if the shutdown lasts for 10 days and 40 percent of federal workers are furloughed, it would cut 1.2 percent from fourth quarter state GDP growth, owing to the higher concentration of federal employees. In addition, federal workers earn about $92,000 annually compared with about $73,000 in the rest of the country.

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Mikra Krasniqi

Mikra Krasniqi